Question 1

All of the following are reasons that companies hold treasury stock EXCEPT ______.

Accepted Answer

A)  compliance with SEC regulations that a certain amount of company shares must be kept by the company 
B)  disposition of excess cash 
C)  financial restructuring 
D)  future corporate needs 
A)  compliance with SEC regulations that a certain amount of company shares must be kept by the company 
B)  disposition of excess cash 
C)  financial restructuring 
D)  future corporate needs

Question 2

Assume that the dividend ($3.25) on Central Power Company's common stock issue is paid annually at the end of the year. This dividend is not expected to increase for the foreseeable future. Determine the value of this stock to an investor who requires a 12 percent rate of return.

Accepted Answer

A)  $3.25 
B)  $39 
C)  $12 
D)  $27.08 
A)  $3.25 
B)  $39 
C)  $12 
D)  $27.08

Question 3

By-Your-Leave Travel Agency has reported the dividends listed below. What return could be expected? The price of the stock is $18. (Round the growth rate to the nearest whole percent.) $$\begin{array} { | l | l | } 
\hline \text { Years } & \text { Dividends } \
\hline 2010 & \$ 1.12 \
\hline 2011 & \$ 1.15 \
\hline 2012 & \$ 1.18 \
\hline 2013 & \$ 1.21 \
\hline 2014 & \$ 1.24 \
\hline
\end{array}$$

Accepted Answer

A)  10.11% 
B)  12.02% 
C)  8.15% 
D)  9.74% 
A)  10.11% 
B)  12.02% 
C)  8.15% 
D)  9.74%

Question 4

Many preferred stocks are treated as ____ in determining their values.

Accepted Answer

A)  fixed assets 
B)  perpetuities 
C)  convertible securities 
D)  constant growth securities 
A)  fixed assets 
B)  perpetuities 
C)  convertible securities 
D)  constant growth securities

Question 5

The stock of Melody Music City is selling for $37.50 and pays a current annual dividend of $1.10. What is the implied growth rate of dividends for this firm (assume dividends are expected to grow at a constant rate) if an investor's required rate of return is 14 percent?

Accepted Answer

A)  11.07% 
B)  14.0% 
C)  11.4% 
D)  10.75% 
A)  11.07% 
B)  14.0% 
C)  11.4% 
D)  10.75%

Question 6

What is the estimated price of Once in a Blue Moon stock that has the following dividends? The return on similar investments is 18%. (Round the growth rate to the nearest whole percent.) $$\begin{array} { | l | l | } 
\hline \text { YEAR } & \text { DIIDENDS } \
\hline 2014 & \$ 2.50 \
\hline 2013 & \$ 2.48 \
\hline 2012 & \$ 2.36 \
\hline 2011 & \$ 2.32 \
\hline
\end{array}$$

Accepted Answer

A)  $17 
B)  $13 
C)  $22 
D)  $50 
A)  $17 
B)  $13 
C)  $22 
D)  $50

Question 7

In marketing a new security issue, the investment banker assumes the risk of not being able to sell the security at a favorable price in each of the following cases EXCEPT _____.

Accepted Answer

A)  a best efforts offering 
B)  a negotiated underwriting 
C)  a competitively bid underwriting 
D)  All of these cases have the assumption of risk 
A)  a best efforts offering 
B)  a negotiated underwriting 
C)  a competitively bid underwriting 
D)  All of these cases have the assumption of risk

Question 8

A procedure that allows a firm to file a master registration statement with the SEC and then sell an offering of common stock in small increments is known as ____.

Accepted Answer

A)  a Green Shoe option 
B)  an IPO 
C)  rule 215 
D)  a shelf registration 
A)  a Green Shoe option 
B)  an IPO 
C)  rule 215 
D)  a shelf registration

Question 9

Bellbottom Gongs, Inc. pays a quarterly dividend of $0.70, has a PE ratio of 14, and closed yesterday at $48.25. What is the dividend yield?

Accepted Answer

A)  5.45% 
B)  1.45% 
C)  5.8% 
D)  7.25% 
A)  5.45% 
B)  1.45% 
C)  5.8% 
D)  7.25%

Question 10

The zero growth dividend valuation model is used when a firm's future dividends are expected to remain constant _______.

Accepted Answer

A)  so the value of the firm should also remain constant 
B)  so the required rate of return should also remain constant 
C)  and the firm cannot be valued 
D)  forever 
A)  so the value of the firm should also remain constant 
B)  so the required rate of return should also remain constant 
C)  and the firm cannot be valued 
D)  forever

Question 11

Helluva stock currently pays a dividend of $1.20 per share. Dividends are expected to increase at the rate of $0.10 per share for the next eight years. Determine the current value of Helluva common stock to an investor who expects to be able to sell the stock for $28 after 5 years. Assume that the investor requires a 12 percent rate of return on the security.

Accepted Answer

A)  $66.00 
B)  $28.00 
C)  $21.20 
D)  $15.88 
A)  $66.00 
B)  $28.00 
C)  $21.20 
D)  $15.88

Question 12

Dillinger Inc. is planning to raise additional capital for expansion by selling 500,000 common shares at $16 each. The existing stockholders' equity section of its balance sheet is shown below. What will the retained earnings figure be immediately after the sale of the new equity? $$\begin{array} { l l } 
\text { Common stock; } \$ 1 \text { par value; authorized, 3,000,000 shares; issued and } \
\text { outstanding, 3,000,000 shares } & \$ 3,000,000 \
\text { Additional paid-in capital } & \$ 6,500,000 \
\text { Retained earnings } & \$ 4,752,000 \
\text { Total stockholders' equity } & \$ 14,252,000
\end{array}$$

Accepted Answer

A)  $12,252,000 
B)  $14,000,000 
C)  $4,752,000 
D)  $3,500,000 
A)  $12,252,000 
B)  $14,000,000 
C)  $4,752,000 
D)  $3,500,000

Question 13

During the past 8 years, Beef Wellington Cattle Company's common stock dividends have grown from $2.00 to $3.19. Estimate the compound annual dividend growth rate over the 8-year period.

Accepted Answer

A)  59.5% 
B)  6% 
C)  12% 
D)  19% 
A)  59.5% 
B)  6% 
C)  12% 
D)  19%

Question 14

Some corporations issue dual classes of stock with unequal voting power. One justification offered by supporters of the dual class system is that it _____.

Accepted Answer

A)  favors long-term business health over short-term profits 
B)  is more democratic than most single class systems 
C)  is more positively correlated with business success than are other systems 
D)  induces a greater number of investors to purchase stock in the firm 
A)  favors long-term business health over short-term profits 
B)  is more democratic than most single class systems 
C)  is more positively correlated with business success than are other systems 
D)  induces a greater number of investors to purchase stock in the firm

Question 15

The constant growth dividend valuation model does not hold when _____.

Accepted Answer

A)  ke is greater than g 
B)  dividends are growing faster than 4 percent 
C)  g is greater than ke 
D)  the current dividend is known 
A)  ke is greater than g 
B)  dividends are growing faster than 4 percent 
C)  g is greater than ke 
D)  the current dividend is known

Question 16

An arrangement whereby an investment banker agrees to purchase an entire new issue of securities is called ____.

Accepted Answer

A)  competitive bidding 
B)  syndication 
C)  a negotiated bid 
D)  underwriting 
A)  competitive bidding 
B)  syndication 
C)  a negotiated bid 
D)  underwriting

Question 17

During the past 7 years, Burger Flippin' Corp.'s earnings have grown from $0.78 to $1.95 per share. If the past growth rates are expected to continue into the future, what is the current value of Flippin's common stock to an investor who requires a 16% rate of return?

Accepted Answer

A)  $97.50 
B)  $13.93 
C)  $111.15 
D)  $48.50 
A)  $97.50 
B)  $13.93 
C)  $111.15 
D)  $48.50

Question 18

Fast Wheels Inc. expects to pay an annual dividend of $0.72 next year. Dividends have been growing at a compound annual rate of 6 percent and are expected to continue growing at that rate. What is the value of a share of stock of Fast Wheels to an investor who requires a 14 percent rate of return?

Accepted Answer

A)  $9.00 
B)  $5.14 
C)  $9.54 
D)  $8.16 
A)  $9.00 
B)  $5.14 
C)  $9.54 
D)  $8.16

Question 19

Chill Pill Pharmaceuticals is expecting a growth rate of 14% for the next two years due to its new drug. Thereafter it should level to an 8% growth rate. The last dividend paid was $0.65 per share. What price should the stock sell for if investors require 12% return?

Accepted Answer

A)  $18.14 
B)  $22.75 
C)  $19.47 
D)  $20.16 
A)  $18.14 
B)  $22.75 
C)  $19.47 
D)  $20.16

Question 20

Which of the following is NOT a characteristic of common stock?

Accepted Answer

A)  It has no maturity date. 
B)  It is considered a permanent form of long-term financing. 
C)  It has claims on assets prior to those of preferred stock. 
D)  It is a residual form of ownership. 
A)  It has no maturity date. 
B)  It is considered a permanent form of long-term financing. 
C)  It has claims on assets prior to those of preferred stock. 
D)  It is a residual form of ownership.

Exam 8: Common Stock: Characteristics, Valuation, and Issuance

All of the following are reasons that companies hold treasury stock EXCEPT ______.

Assume that the dividend ($3.25) on Central Power Company's common stock issue is paid annually at the end of the year. This dividend is not expected to increase for the foreseeable future. Determine the value of this stock to an investor who requires a 12 percent rate of return.

By-Your-Leave Travel Agency has reported the dividends listed below. What return could be expected? The price of the stock is $18. (Round the growth rate to the nearest whole percent.) Years Dividends 2010 \ 1.12 2011 \ 1.15 2012 \ 1.18 2013 \ 1.21 2014 \ 1.24

Many preferred stocks are treated as ____ in determining their values.

The stock of Melody Music City is selling for $37.50 and pays a current annual dividend of $1.10. What is the implied growth rate of dividends for this firm (assume dividends are expected to grow at a constant rate) if an investor's required rate of return is 14 percent?

What is the estimated price of Once in a Blue Moon stock that has the following dividends? The return on similar investments is 18%. (Round the growth rate to the nearest whole percent.) YEAR DIIDENDS 2014 \ 2.50 2013 \ 2.48 2012 \ 2.36 2011 \ 2.32

In marketing a new security issue, the investment banker assumes the risk of not being able to sell the security at a favorable price in each of the following cases EXCEPT _____.

A procedure that allows a firm to file a master registration statement with the SEC and then sell an offering of common stock in small increments is known as ____.

Bellbottom Gongs, Inc. pays a quarterly dividend of $0.70, has a PE ratio of 14, and closed yesterday at $48.25. What is the dividend yield?

The zero growth dividend valuation model is used when a firm's future dividends are expected to remain constant _______.

During the past 8 years, Beef Wellington Cattle Company's common stock dividends have grown from $2.00 to $3.19. Estimate the compound annual dividend growth rate over the 8-year period.

Some corporations issue dual classes of stock with unequal voting power. One justification offered by supporters of the dual class system is that it _____.

The constant growth dividend valuation model does not hold when _____.

An arrangement whereby an investment banker agrees to purchase an entire new issue of securities is called ____.

During the past 7 years, Burger Flippin' Corp.'s earnings have grown from $0.78 to $1.95 per share. If the past growth rates are expected to continue into the future, what is the current value of Flippin's common stock to an investor who requires a 16% rate of return?

Fast Wheels Inc. expects to pay an annual dividend of $0.72 next year. Dividends have been growing at a compound annual rate of 6 percent and are expected to continue growing at that rate. What is the value of a share of stock of Fast Wheels to an investor who requires a 14 percent rate of return?

Chill Pill Pharmaceuticals is expecting a growth rate of 14% for the next two years due to its new drug. Thereafter it should level to an 8% growth rate. The last dividend paid was $0.65 per share. What price should the stock sell for if investors require 12% return?

Which of the following is NOT a characteristic of common stock?

The Role and Objective of Financial Management

The Domestic and International Financial Marketplace

Evaluation of Financial Performance

Financial Planning and Forecasting

The Time Value of Money

Continuous Compounding and Discounting

Fixed Income Securities: Characteristics and Valuation

Analysis of Risk and Return

Capital Budgeting and Cash Flow Analysis

Mutually Exclusive Investments Having Unequal Lives

Capital Budgeting: Decision Criteria and Real Option Considerations

Capital Budgeting and Risk

The Cost of Capital

Capital Structure Concepts

Breakeven Analysis

Capital Structure Management in Practice

Dividend Policy

Working Capital Policy and Short-Term Financing

The Management of Cash and Marketable Securities

The Management of Accounts Receivable and Inventories

Lease and Intermediate Term Financing

Financing With Derivatives

Bond Refunding Analysis

Risk Management

International Financial Management

Corporate Restructuring

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